I refinanced my home about a year ago with a 5.125% rate and paid no fees. A lender called me and said I could lower my payment by $110 a month by refinancing. Should I do this, or is it too soon?
Many people are refinancing again, because today's best mortgage rates are the lowest in some time and homeowners don't want to leave money on the table if they can avoid it. That said, your decision to refinance or not depends on a few things. You mentioned that you could achieve some monthly savings but didn't say where the savings come from. To decide if a refinance is for you, check the following:
- Input your current mortgage balance and rate into a mortgage payment calculator, with a new 30-year term. Your payment will drop, but it obviously isn't from any savings--your payment drops because you're extending the time it takes for you to pay off your loan. Subtract the difference in payment from $110; that will give you the "real" savings you could achieve from a refinance if there are no costs involved.
- Get a Good Faith Estimate and see what fees are involved. A loan that drops your mortgage rate and payment does not necessarily save you money if the fees are high. You'll either be paying out of pocket or with your home equity. ShopRate.com's Should I Refinance? calculator can tell you how long it takes to recoup your fees with a lower payment, and what your true savings is over the life of your loan.
- Understand your goals. Refinance savings and mortgage APRs are distorted if you sell your home or refinance again in a few years. If that's your plan, consider mortgages with shorter breakeven periods (lower fees) and lower rates (ARMs or hybrid ARMs, which offer rates of 0.5% to over 1% lower than 30-year fixed mortgages).
Many factors drive your decision to refinance a mortgage. Getting mortgage quotes from several lenders and running the offers through a refinance calculator are good first steps in the decision process.